Where are the opportunities in oil, gas, gold, and metals?
The third edition of the global sector series looks at the emergence of a supercycle in commodities, the future of oil, and where value investments can be found.
A decade on from the last commodity supercycle and prices are soaring, with copper, lumber, and iron ore hitting record highs in May 2021. But how credible are claims of a sustained bull market in oil, gas, minerals and metals?
Philip Lindop, Head of EMEA Natural Resources at Barclays Investment Bank says the fundamentals for a commodities rally are strong, but require careful analysis.
“After 150 years of industrialisation a lot of the mines that supported economic development are coming to their natural end,” he observes. “And so the next generation of supply is typically lower grade. These projects tend to be located in countries thought to be high risk.”
Gold enjoyed a strong 2020, but do supercycle economic fundamentals apply here? “The only thing that empirically drives the gold price is real interest rate expectations,” says Lindop. “It's reasonable to see gold in the higher $1,600s to $1,700/oz for the foreseeable future.”
“We are in a Goldilocks equilibrium between the fiscal stimulus, which traditionally had inflationary characteristics, and expectations of relatively benign quantitative easing and central bank support, and an emerging debate that interest rates, growth, and consequential inflationary growth are just not going to behave as they did in the 70s and 80s.”
Lindop sees individual gold producers as potentially attractive: “Given the pronounced discipline with which these gold companies have been run for the last 10 or 15 years, I would say with confidence that never has more free cash flow been generated by gold companies. It feels like a benign environment.”
Gas and oil
Michael Powell, Co-Head of Oil and Gas EMEA at Barclays Investment Bank, is blunt about the positive indicators in the market: “All markets anticipate a sharp demand recovery on the back of vaccine rollouts, fiscal bazookas and the bounce back in economic activity. We expect demand levels for oil will return where they were pre-COVID by the end of next year.”
On the supply side, production will be constrained: “Supply will lag and it’s fundamentally down to producer caution,” he says. “OPEC+ has followed through on the production cuts announced in April last year. We see the majors being super-focused on capital discipline.”
The result could be a gently rising market: “Inventories will return to normal. They've already shrunk by 40 per cent from the peak last year. The Barclays Private Bank view is that we could see an average for 2021 of $66 Brent and $71 next year. Potentially that could be $10 above the forward curve. There could well be upside to that.”
Forecasting net zero is a tough job, warns Powell. “There’s no silver bullet. We need time to build infrastructure to deliver energy to market, as well as market mechanisms such as carbon credits to guide investment, and government intervention, taxes, grants and subsidies.”
“To put it into context, the UN says oil and gas in 2040 will be 48 per cent of the global energy mix. It is 55 per cent today, not a big change. The real loser in the energy mix is coal. We can see oil demand peaking before 2025.”
Even when the technology exists to replace hydrocarbons, the investment needed, and timescale, are huge. Powell adds, “To build out hydrogen to 1000 gigawatts by 2050 will cost a trillion dollars. That will still only be 7 per cent of the global energy mix.”
The UN says oil and gas in 2040 will be 48 per cent of the global energy mix. It is 55 per cent today, not a big change.
Powell states there are three areas worth researching. “One interesting theme is take-privates [in oil and gas]. I can think of three public companies which chose to go private, all in the broad services space, with large family controlling shareholders all frustrated with public valuations. I think all are going to be successful transactions.”
Second: “The IPO market has been red hot for Spacs for technology. But an element has been brave enough to test it for oil and gas. I think even if commodity prices stay strong and the market reopens for the very best in class oil and gas companies, many businesses won't offer investors the necessary liquidity or scale and there will be a vintage of businesses owned by private equity that is looking for liquidity.”
Third: “For asset opportunities, the buyer universe again has changed. There are less publicly listed buyers, less Asian, less overseas. Particularly in the emerging markets, there are growing opportunities for private investors, to build scale, reduce cost, run the businesses for cash for several decades. Enjoy a landscape where there is diminishing competition from listed players.”
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